¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______
to _______

Commission File Number 1-9309

(Exact name of registrant as specified
in its charter)

DELAWARE

54-0852979

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

6850 Versar Center

Springfield, Virginia

22151

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number,
including area code (703) 750-3000

Not Applicable

(Former name, former address and former fiscal year, if changed
since last report.)

Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.

Yes x
No ¨

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).

Yes x
No ¨

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if
a smaller reporting company)

Smaller reporting company x

Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).

Yes ¨
No x

Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practical date.

Class of Common Stock

Outstanding at February 4, 2013

$.01 par value

9,841,510

VERSAR, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

PAGE

PART I – FINANCIAL INFORMATION

ITEM 1.

Financial Statements.

Condensed Consolidated Balance Sheets as of December
28, 2012 (unaudited) and June 29, 2012.

3

Unaudited Condensed Consolidated Statements of
Income for the Three Months and Six Months Ended December 28, 2012 and December 30, 2011.

4

Unaudited Condensed Consolidated Statements of
Comprehensive Income for the Three Months and Six Months Ended December 28, 2012 and December 30, 2011.

5

Unaudited Condensed Consolidated Statements of
Cash Flows for the Six Months Ended December 28, 2012 and December 30, 2011.

6

Unaudited Notes to Condensed Consolidated Financial
Statements.

7

ITEM 2.

Management’s Discussion and Analysis of
Financial Condition and Results of Operations.

The accompanying notes are an integral
part of these condensed consolidated financial statements.

6

VERSAR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

NOTE A – BASIS OF PRESENTATION

The condensed consolidated
financial statements of Versar, Inc. and its wholly-owned subsidiaries (“Versar” or the “Company”) contained
in this report are unaudited but reflect all normal recurring adjustments which, in the opinion of management, are necessary for
the fair presentation of the results of the interim periods reflected. All significant intercompany balances and transactions
have been eliminated in consolidation. Certain information and footnote disclosures normally included in the consolidated financial
statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
have been omitted pursuant to applicable rules and regulations of the Securities and Exchange Commission (“SEC”).
Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company’s Annual Report on Form 10–K for the fiscal year ended June 29, 2012. The
results of operations for the three-month and six-month periods reported herein are not necessarily indicative of results to be
expected for the full year. The fiscal year-end balance sheet data included in this report was derived from audited financial
statements. The Company’s fiscal year is based upon a 52 - 53 week calendar, ending on the Friday nearest June 30. The three-month
periods ended December 28, 2012 and December 30, 2011 each included 13 weeks and the corresponding six-month periods each include
26 weeks, respectively. Fiscal year 2013 and 2012 will both include 52 weeks.

Prior Year Reclassification:
Certain prior year business segment amounts have been reclassified in order to conform to the current year realigned segment
presentation. See Note B - Business Segments for additional information.

NOTE B – BUSINESS SEGMENTS

In previous years,
the Company operated in four business segments: Program Management, Environmental Services, Professional Services, and National
Security. During fiscal year 2012, the Company’s management undertook a strategic initiative to assess the Company’s
internal processes and organizational structures with the intention of identifying opportunities to streamline and improve these
areas. As a result of this strategic initiative, the Company modified certain organizational structures in fiscal year 2012 which
resulted in the realignment of the Company’s business segments. The Company’s operations were first reported based
on these realigned segments in the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2012.
As part of this realignment, the operations of the National Security business segment were primarily allocated to the previous
Program Management Segment, which was renamed Engineering and Construction Management, and the remaining National Security operations
were allocated to the Environmental Services business segment. Certain management lines of authority were also revised consistent
with these structural changes. These segments were aligned based on the nature of the work, business processes, customer base
and the business environment in which each of the segments operates. The Company’s resulting three business segments are
as follows:

·

Engineering
and Construction
Management

·

Environmental
Services

·

Professional
Services

The new alignment
of the business segments is consistent with how the Company’s Chief Executive Officer, (“CEO”) assessed our
operations since completion of the 2012 initiative and will assess our operations going forward. The business segments have discrete
financial information that is used by the CEO, in allocating resources and making financial decisions. The CEO evaluates and measures
the performance of the Company’s business segments based on gross revenue and gross profit. Selling, general and administrative
expenses, interest and income taxes have not been allocated to the Company’s business segments.

The Company’s
Engineering and Construction Management business segment manages large complex construction
projects representing various international and domestic clients. The Environmental Services business segment provides full service
environmental consulting including regulatory, risk assessments, unexploded ordinance clean-up/military munitions response programs,
natural and cultural resources, and remediation support to several federal government and municipal agencies. The Professional
Services business segment provides outsourced personnel to various government agencies providing the Company’s clients with
cost-effective onsite resources.

7

Presented below is
summary operating information for the Company for the three-month and six-month periods ended December 28, 2012 and December 30,
2011. The presentation of this information for the three-month and six-month periods ended December 30, 2011 has been reclassified
to conform to the realigned presentation.

For the Three Months Ended

For the Six Months Ended

December 28, 2012

December 30, 2011

December 28, 2012

December 30, 2011

(in thousands)

GROSS REVENUE

Engineering and Construction Management

$

13,047

$

20,005

$

24.815

$

41,837

Environmental Services

7,793

7,525

16,017

15,465

Professional Services

3,875

3,750

7,434

7,262

$

24,715

$

31,280

$

48,266

$

64,564

GROSS PROFIT (a)

Engineering and Construction Management

$

1,559

$

2,400

$

3,552

$

4,926

Environmental Services

1,179

435

1,929

1,040

Professional Services

1,030

612

1,600

1,214

$

3,768

$

3,447

$

7,081

$

7,180

Selling, general and administrative expenses

2,249

2,126

4,174

4,508

Other expenses

—

19

—

53

OPERATING INCOME

$

1,519

$

1,302

$

2,907

$

2,619

(a)

Gross Profit is defined as gross revenue less purchased services
and materials, at cost, less direct costs of services and overhead.

NOTE C– ACCOUNTS RECEIVABLE

Years Ended

December 28, 2012

June 29, 2012

(in thousands)

Billed receivables

U.S. Government

$

8,303

$

13,596

Commercial

5,257

3,065

Unbilled receivables

U.S. Government

8,500

9,387

Commercial

922

1,018

Total receivables

22,982

27,066

Allowance for doubtful accounts

(1,197

)

(1,468

)

Accounts receivable, net

$

21,785

$

25,598

Unbilled receivables
represent amounts earned which have not yet been billed and other amounts which can be invoiced upon completion of fixed-price
contract milestones, attainment of certain contract objectives, or completion of federal and state governments’ incurred
cost audits. Management anticipates that such unbilled receivables will be substantially billed and collected in fiscal year 2013;
therefore, they have been presented as current assets in accordance with industry practice.

8

NOTE D – INVENTORY

The Company’s inventory balance includes
the following:

As of

December 28, 2012

June 29, 2012

(In thousands)

Finished goods

$

740

$

613

Raw materials

519

767

Work-in-process

136

48

Total

$

1,395

$

1,428

NOTE E – GOODWILL

The carrying value
of goodwill at December 28, 2012 and June 29, 2012 was $7.5 million and $7.4 million, respectively. The Company’s goodwill
balance was derived from the acquisition of Charron Construction Consulting, Inc. (“Charron”) in fiscal year 2012,
the acquisitions of PPS and ADVENT in fiscal year 2010, and the acquisition of VGI in fiscal year 1998. A roll-forward of the
carrying value of the Company’s goodwill balance, by business segment, is as follows (in thousands):

Goodwill Balances

Engineering and Construction Management

Environmental Services

Total

Balance, July 1, 2011

$

3,790

$

1,968

$

5,758

Charron Acquisition

1,660

—

1,660

Balance, June 29, 2012

$

5,450

$

1,968

$

7,418

Charron purchase price adjustment

97

—

97

Balance, December 28, 2012

$

5,547

$

1,968

$

7,515

During the first quarter
of fiscal 2013, the Company paid the remaining $200,000 holdback balance related to the Charron acquisition, and an additional
$97,000 related to the purchase price adjustment of this acquisition. The purchase price adjustment balance was recorded as an
increase in goodwill as the increase in the final acquisition price did not affect the determination of the fair value of net
assets of the acquired entity.

NOTE F – OTHER CURRENT LIABILITIES

The Company’s
other current liabilities balance includes the following:

As of

December 28, 2012

June 29, 2012

(In thousands)

Project related reserves

$

1,393

$

2,116

Payroll related

1,035

2,684

Asset retirement obligation

663

663

Deferred rent

519

539

Earn-out obligations

432

432

Severance accrual

90

90

Other

881

885

Total

$

5,013

$

7,409

9

As of December 28,
2012 the Company had contingent liabilities of approximately $0.4 million under earn-out payment provisions related to the acquisition
of Charron, which were recorded within the Other Current Liability line item in the Company’s Consolidated Balance Sheets.

NOTE G – DEBT

Line of Credit

On September 14, 2012,
the Company’s $15 million line of credit facility with United Bank (the “Bank”) was amended and restated to
extend its maturity date to September 25, 2014 and to make certain other changes to the terms and conditions governing the line
of credit, including an increase in the line of credit commitment fee from 17 basis points to 25 basis points. The line of credit
as amended is subject to certain covenants related to the maintenance of financial ratios. These covenants require a minimum tangible
net worth of $18.5 million; a maximum total liabilities to tangible net worth ratio not to exceed 2.0 to 1; and a minimum current
ratio of at least 1.25 to 1. As amended, borrowings under the line of credit bear interest at prime less 0.5% with an interest
rate floor of 3.5%. The Company was in compliance with all financial ratio covenants under the facility as of December 28, 2012
and June 29, 2012. Failure to meet the financial ratio covenant requirements gives the Bank the right to demand outstanding amounts
due under the line of credit, which may impact the Company’s ability to finance its working capital requirements. The Company
had no borrowings under the line of credit at December 28, 2012 and June 29, 2012.

Notes Payable

As part of the acquisition
of Charron in May 2012, the Company issued notes payable with principal amounts totaling $1.0 million, which are payable quarterly
over a three-year period with interest accruing at a rate of 5% per annum. During fiscal year 2013, the Company repaid approximately
$193,000 of this note, which included approximately $26,000 of accrued interest. Accrued interest is recorded within the note
payable line item in the consolidated balance sheet. At December 28, 2012, the outstanding principal balance of the Charron notes
payable was $0.8 million.

NOTE H – NET INCOME
PER SHARE

Basic net income per
common share is computed by dividing net income by the weighted average number of common shares outstanding during the period.
Diluted net income per common share also includes common stock equivalents outstanding during the period, if dilutive. The Company’s
common stock equivalent shares consist of shares to be issued under outstanding stock options and unvested restricted stock units.

For the Three Months Ended

For the Six Months Ended

December 28,
2012

December 30,
2011

December 28,
2012

December 30,
2011

(in thousands)

Weighted average common shares outstanding
– basic

9,507

9,365

9,450

9,352

Effect of assumed exercise of
options and vesting of restricted stock unit awards, known as the treasury stock method

29

26

29

20

Weighted average common shares
outstanding – diluted

9,536

9,391

9,479

9,372

For each of the three
and six month periods ended December 28, 2012, options to purchase approximately 22,000 shares of common stock were not included
in the computation of diluted earnings per share because the effect would be anti-dilutive. For each of the three and six month
periods ended December 30, 2011, options to purchase approximately 168,000 shares of common stock were not included in the computation
of diluted earnings per share because the effect would be anti-dilutive.

10

NOTE I – SHARE-BASED
COMPENSATION

Restricted Stock
Unit Activity

In November 2010,
the stockholders approved the Versar, Inc. 2010 Stock Incentive Plan (the “2010 Plan”), under which the Company may
grant incentive awards to directors, officers, and employees of the Company and its affiliates and to service providers to the
Company and its affiliates. One million shares of Versar common stock were reserved for issuance under the 2010 Plan. The 2010
Plan is administered by the Compensation Committee of the Board of Directors. Through December 28, 2012, a total of 314,560 restricted
stock units have been issued under the 2010 Plan. There are 685,440 shares remaining available for future issuance of awards (including
restricted stock units) under the 2010 Plan.

During the six-month
period ended December 28, 2012, the Company awarded 205,000 restricted stock units to its executive officers and certain employees,
which generally vest over a period of one or two years following the date of grant. The total unrecognized compensation cost,
measured on the grant date, that relates to non-vested restricted stock awards at December 28, 2012, was approximately $588,371,
which if earned, will be recognized over the weighted average remaining service period of two years. Share-based compensation
expense relating to all outstanding restricted stock unit awards totaled approximately $161,964 and $62,000 for the three months
ended December 28, 2012 and December 30, 2011, respectively. Share-based compensation expense relating to all outstanding restricted
stock unit awards totaled approximately $219,000 and $121,000 for the six months ended December 28, 2012 and December 30, 2011,
respectively. These expenses were included in the direct costs of services and overhead and general and administrative lines of
the Company’s Condensed Consolidated Statements of Income.

Stock Option Activity

There were 107,200
options outstanding and exercisable as of December 28, 2012 with a weighted average exercise price of $3.65, weighted average
remaining contractual life of 1.37 years, and an aggregate intrinsic value of $391,381. No stock options were issued during the
six months ended December 28, 2012 or the six months ended December 30, 2011.

Total non-qualified
stock options granted under the Company’s 2010 Plan and prior stock incentive plans are as follows:

Optioned Shares

Weighted- Average Option Price Per Share

Total

(in thousands, except per share price)

Outstanding at June 29, 2012

65

$

2.38

$

156

Exercised

(46

)

$

(1.83

)

(84

)

Outstanding at December 28, 2012

19

$

3.70

$

72

NOTE J – INCOME
TAXES

As of December 28,
2012 and June 29, 2012, the Company had approximately $2.0 million and $2.2 million, respectively, in net deferred income tax
assets, which are primarily related to temporary differences between financial statement and income tax reporting. Such differences
included depreciation, deferred compensation, accruals and reserves. The Company regularly reviews the recoverability of its deferred
tax assets and establishes a valuation allowance as deemed appropriate. As of December 28, 2012 and June 29, 2012, the Company
had $61,000 and $58,000, respectively, recorded as a valuation allowance. The effective tax rates were approximately 38.1% and
39.2% for the first six months of fiscal 2013 and 2012, respectively. The decrease in effective tax rate in the first six months
of fiscal year 2013 was due to the decrease in permanent nondeductible expenses.

.

11

ITEM 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations

General Information

The following discussion
and analysis relates to our financial condition and results of operations for the three and six month periods ended December 28,
2012 and December 30, 2011. This discussion should be read in conjunction with our condensed consolidated financial statements
and other information disclosed herein as well as the “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” contained in our Annual Report on Form 10-K for the fiscal year ended June 29, 2012, including
the critical accounting policies and estimates discussed therein. Unless this Form 10-Q indicates otherwise or the context otherwise
requires, the terms “we,” “our,” the “Company,” “us,” or “Versar”
as used in this Form 10-Q refer to Versar, Inc. and subsidiaries.

This quarterly report
on Form 10-Q contains forward-looking statements in accordance with the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, which are subject to risks and uncertainties. Forward-looking statements typically include assumptions, estimates
or descriptions of our future plans, strategies and expectations, are generally identifiable by the use of the words “anticipate,”
“will,” “believe,” “estimate,” “expect,” “intend,” “seek,”
or other similar expressions. Examples of these include discussions regarding our operations and financial growth strategy, projections
of revenue, income or loss and future operations.

These forward-looking
statements and our future financial performance may be affected by a number of factors, including, but not limited to, the “Risk
Factors” contained in Part I, Item 1A., “Risk Factors” of our Annual Report on Form 10-K for the fiscal year
ended June 29, 2012. Actual operations and results may differ materially from those forward-looking statements expressed in this
Form 10-Q.

Overview

We are a global project
management company providing sustainable value oriented solutions to government and commercial clients primarily in three market
areas: (1) Engineering and Construction Management; (2) Environmental Services; and (3) Professional Services. We also provide
tailored and secure solutions in harsh environments and offer specialized abilities in classified projects and hazardous material
management.

Business Segments

During
fiscal year 2012, management realigned the Company’s organizational structure resulting in the Company’s operations
being reorganized into three business segments, which are described below. For additional information regarding our business segments
see Note B - Business Segments, of the Notes to the Consolidated Financial Statements included elsewhere in this report
on Form 10-Q.

Engineering
and Construction Management Segment

This business segment,
previously referred to as Program Management, now includes the majority of our operations that were formerly included in our National
Security business segment and performs Title I Design Services, Title II Construction Management Services, and Title III Construction
Services, which are discussed further in the initial bullet below. This business segment also provides other related engineering
and construction type services both in the United States and internationally and provides national security solutions in several
markets that require ongoing services and support and which have received funding priority. Our services in this segment include
the following:

·

Title
I Design Services
entails a broad-range
of expertise including
project scoping/development,
design, cost estimation,
value engineering,
and feasibility
studies. Title
II Construction
Management Services
involve construction
oversight, inspection,
job site evaluations,
and construction
documentation among
other areas. Other
related services
include system
optimization and
commissioning,
scheduling, and
quality assurance/control.
Title III Construction
Services are the
actual construction
services. Some
staff members in
this business segment
also hold security
clearances enabling
Versar to provide
services for classified
construction efforts.

·

This
segment consists
of federal, state,
local, international,
and commercial
clients. Examples
of federal work
include construction
and construction
management services
for the U.S. Air
Force, construction
management and
personal services
including electrical
and engineering
support to the
U.S. Army Corps
of Engineers, project
and construction
management services
for the District
of Columbia Courts,
and other construction
efforts. Construction
work has been primarily
concentrated in
the municipal/state
marketplace where
we manage and construct
water, wastewater,
and other infrastructure
projects.

12

·

This
business segment
continues to pursue
the development
of opportunities
in energy/green
initiatives in
conjunction with
the Environmental
Services business
segment.

·

We
provide to first
responders a Disposable
Toxicological Agent
Protective System
(“DTAPS®”)
Level B coverall
chemical/biological
protective suit,
which is the first
in the industry
to be certified
by the Safety Equipment
Institute to the
National Fire Protection
Association Class
2 standards. In
addition, we own
and operate the
only declared Schedule
I chemical agent
laboratory in the
United States under
the Chemical Weapons
Convention, which
is overseen by
the Department
of Commerce. The
laboratory provides
cost-effective
materials testing
services to the
U.S. Government
and to private
industries, particularly
manufacturers of
chemical protective
equipment and clothing.

Environmental
Services Segment

This business segment,
previously referred to as Compliance and Environmental Programs, now includes the remainder of our operations formerly included
in our National Security business segment, provides full service environmental solutions and includes our remediation and compliance,
exposure and risk assessment, natural resources, unexploded ordnance (“UXO”)/military munitions response program (“MMRP”),
air, greenhouse gas, energy, and cultural resources services. Clients include a wide-range of federal and state agencies. Some
examples include the following:

·

We
have supported
the U.S. Environmental
Protection Agency
for the past 30
years providing
a wide-range of
regulatory mandated
services involving
exposure assessment
and regulatory
review.

·

We
provide support
to the U.S. Army
Corps of Engineers,
Air Force, and
many local municipal
entities assisting
with environmental
compliance, remediation,
biological assessments,
and natural resource
management. This
includes performance-based
remediation (“PBR”)
contracts for Air
Force Civil Engineer
Center (“AFCEC”).

·

For
more than 30 years,
Versar has supported
the states of Virginia,
Maryland, New York,
Pennsylvania and
Delaware on a variety
of different environmental
projects. For example,
we have supported
the State of Maryland
in the assessment
of the ecological
health and natural
resources risk
of the Chesapeake
Bay. Versar continues
to assess how the
Delaware River
is affected by
dredging programs.
We assist several
counties in Maryland
and Virginia with
their watershed
programs, identifying
impaired watersheds
and providing cost-effective
solutions for their
restoration programs.
We provide energy
feasibility review,
measurement and
verification to
the State of New
York.

·

We
hold a key UXO
removal contract
supporting one
of the largest
U.S. Air Force
testing and training
ranges in the country.
We exclusively
provide UXO clean-up
services at Ft.
Irwin, CA, which
is the National
Training Center
for DoD. This center
is the size of
Rhode Island and
provides live fire
training for U.S.
Army forces.

Professional Services Segment

This business segment
provides onsite environmental management, planning and engineering services to DoD and to the U.S. Department of Commerce. Versar’s
provision of on-site services, or staff augmentation, serves to enhance the mission of the customer with subject matter experts
fully dedicated to mission objectives. This segment serves government business by realigning two or more facilities management
functions to establish a single entity and by supporting customers in areas where their capabilities and capacities are lacking.

·

This
business segment
provides expert
services for
the US Army’s
Net Zero energy,
water, and solid
waste program
for certain U.S.
Army installations.
Net Zero energy
means the installation
produces as much
energy/water/solid
waste onsite
as it uses. Our
professionals
facilitate strategic
initiatives,
develop implementation
plans, conduct
outreach, and
apply technologies
to deliver progress
towards site-specific
goals and objectives.

·

This
segment has installation
restoration managers
fielded under
the Defense Environmental
Restoration Program
to clean-up landfill
and disposal
sites throughout
the nation and
in Puerto Rico.

·

Versar
serves the DoD
Joint Base communities
with facility
and utilities
integration,
National Environmental
Policy Act considerations,
water program
management and
wildlife program
management.

·

We
manage hazardous
materials and
waste for large
quantity generator
sites through
application of
green procurement
philosophies
and hazardous
material control
program concepts.

13

·

This
segment provides
staff augmentation
ranging from
field support
of archaeological
investigations
to senior level
advisors. Our
archaeological
and historic
preservation
professionals
advise government
officials regarding
the protection
of our nation’s
cultural resources.

·

We
provide biological
and physical
sciences support
to the National
Oceanic Atmospheric
Administration
to ensure efficiencies
and accuracies
in the lab environment.

Financial Trends

We believe that fiscal
year 2013 and beyond will continue to offer significant challenges. For the near-term, it appears that the U. S. economy will
continue to be challenged by reduced government funding, high unemployment, and debt reduction pressures
that affect government spending patterns at all levels, including the pending sequestration process that is currently scheduled
to commence on March 2, 2013. We believe that each of our business segments have the expertise and is well positioned to address
the challenges raised by these national economic issues. In the current economic environment, we benefit from the fact that value-driven
economic metrics are dictating more efficient services for our clients, in combination with continuing revenues from existing
mandated government programs that utilize our services. We believe our broad range of project management skills will allow us
to effectively target areas where ongoing government expenditures (both domestically and internationally) will be necessary, areas
such as sustainable military range management, contingency operations support, and environmental assessments and remediation.

Specifically, we see
the following three elements driving our strategy going forward:

·

Pursuit
of larger contract
opportunities.
Our move to a large
business, coincident
with development
of a strong internal
infrastructure
and associated
technologies, is
allowing us to
focus on pursuing
larger prime contracts
and expand our
pool of opportunities.
We continue to
strengthen our
relationships with
other contractors
to create teaming
arrangements that
better serve our
clients.

·

Leveraging
of our services.
The combination
of our multiple
skill sets and
broad service offerings
will allow us to
work efficiently
in the new economic
environment whether
selling sustainable
risk management
services utilizing
our energy and
environmental skill-sets,
or via effective
use of our project
and construction
management skills
in relation to
complex project
oversight.

·

Expanding
our international
footprint.
While strong internationally
in the construction
management business,
incorporation of
our non-construction
services into our
overseas client-base
will allow for
replication of
our proven domestic
skills into the
international market
and will help us
meet growing overseas
client needs.

We believe
our balance sheet is strong, and we are well positioned with our cash balance on hand to handle unforeseen challenges while we
continue to pursue merger and acquisition activity. As of the quarter ended December 28, 2012 we had $13.7 million of cash on
hand and a working capital balance of $24.8 million. We also continue to have access to a line of credit of $15 million.

14

Consolidated Results of Operations

The table below sets
forth our consolidated results of operations for the three and six months ended December 28, 2012 and December 30, 2011:

For the Three Months Ended

For the Six Months Ended

December 28, 2012

December 30, 2011

December 28, 2012

December 30, 2011

(dollars in thousands)

GROSS REVENUE

$

24,715

$

31,280

$

48,266

$

64,564

Purchased services and materials, at cost

9,891

16,085

18,216

32,243

Direct costs of services and overhead

11,056

11,748

22,969

25,141

GROSS PROFIT

$

3,768

$

3,447

$

7,081

$

7,180

Gross profit percentage

15.2

%

11.0

%

14.7

%

11.1

%

Selling, general and administrative expenses

2,249

2,126

4,174

4,508

Other expense

—

19

—

53

OPERATING INCOME

1,519

1,302

2,907

2,619

OTHER (INCOME) EXPENSE

Interest (income)

—

(39

)

(1

)

(68

)

Interest expense

22

19

46

49

INCOME BEFORE INCOME TAXES

$

1,497

$

1,322

$

2,862

$

2,638

Three Months Ended December 28, 2012 compared to the
Three Months Ended December 30, 2011

Gross revenue for
the second quarter of fiscal 2013 was $24.7 million, a decrease of 21.1% compared to $31.3 million during the second quarter
of the last fiscal year. This decrease was a result of anticipated reductions in government spending for
international reconstruction operations in Iraq. This slowdown was coupled with lower domestic revenue of approximately $1.8
million related to the completion of the Tooele Chemical Demilitarization project during fiscal year 2012. However, the
recent award of the $170 million Afghan PSC contract should re-energize our work in Afghanistan.

Purchased services
and materials for the second quarter of fiscal 2013 was $9.9 million, a decrease of 38.5% compared to $16.1 million experienced
during the second quarter of the last fiscal year. This decrease largely resulted from the previously mentioned slowdown in international
spending and lower domestic revenue.

Direct costs of services
and overhead for the second quarter of fiscal 2013 were $11.1 million, a decrease of 5.1% compared to $11.7 million experienced
during the second quarter of the last fiscal year. This decrease was primarily attributable to our tight control of costs related
to our Title II Construction Management Services projects and our electrical inspection projects within our Engineering and Construction
Management business segment. We began performing more work in-house, thereby increasing labor costs which slightly offset the
decrease in the costs mentioned above.

Gross profit for the
second quarter of fiscal 2013 was $3.8 million, an increase of 11.8% compared to $3.4 million during the second quarter of the
last fiscal year. The gross profit percentage increased from 11.0% to 15.3% as we continue to focus on controlling costs by improving
efficiencies on fixed price contracts, implementing measures to decrease overhead costs, such as renegotiating current office
leases in order to reduce rent expense, and implement video conferencing and other technologies to reduce travel expenses. We
also continue to focus on improving project management by providing the necessary training and improved project management tools
to our staff.

Selling,
general and administrative expenses for the second quarter of fiscal 2013 were $2.2 million, an increase of 4.8% compared to
$2.1 million during the second quarter of last fiscal year. This increase was primarily due to an increase in board
incentive expense, corporate bonus expense, and severance expense, combined with a corresponding decrease in bid and proposal
costs within the Environmental Services Group.

15

Income tax expense
for the second quarter of fiscal 2013 was $0.6 million, an increase of 20.0% compared $0.5 million during the second quarter of
the last fiscal year. During the second quarter of fiscal 2013, income before income taxes was $1.5 million, an increase of 15.4%
compared to $1.3 million during the second quarter of the last fiscal year. The effective tax rate was approximately 38.2% for
both the second quarters of fiscal years 2013 and 2012.

Net income for the second quarter
of fiscal 2013 was $0.9 million, an increase of 12.5% compared to net income during the second quarter of the last fiscal year.
Net income per share, basic and diluted, for the second quarter of fiscal 2013 was $0.10. Net income per share, basic and diluted,
for the second quarter of fiscal 2012 was $0.09.

Six Months Ended December 28, 2012 compared to the
Six Months Ended December 30, 2011

Gross revenue for
the first six months of fiscal 2013 was $48.3 million, a decrease of 25.2% compared to $64.6 million during the same period of
the last fiscal year. The decrease resulted from anticipated reductions in government spending for international reconstruction
operations in Iraq and of Title II Construction Management Services in Afghanistan. This slowdown was coupled with lower domestic
revenue of approximately $5.5 million related to the completion of the Tooele Chemical Demilitarization project during fiscal
year 2012. However, the
recent award of the $170 million Afghan PSC contract should re-energize our work in Afghanistan.

Purchased services
and materials for the first six months of fiscal 2013 was $18.2 million, a decrease of 43.5% compared to $32.2 million during
the same period of the last fiscal year. The decrease resulted from the previously mentioned slowdown in international spending
and lower domestic revenue.

Direct costs of services for the first
six months of fiscal 2013 were $23.0 million, a decrease of 8.4% compared to $25.1 million during the same period of the last
fiscal year. The decrease resulted from the continued reductions in government spending. Additionally, we strategically began
performing more work in-house to ensure we retain the expertise of our employees.

Gross
profit for the six months of fiscal 2013 was $7.1 million, a decrease of 1.4% compared to $7.2 million during the same period
of the last fiscal year. The gross profit percentage increased from 11.1% to 14.7% as we
continue to focus on controlling costs by improving efficiencies on fixed price contracts, implementing measures to decrease overhead
costs, such as renegotiating current office leases in order to reduce rent expense, and implementing video conferencing and other
technologies to reduce travel expenses. We also continue to focus on improving project management costs by providing the necessary
training and improved project management tools to our staff.

Selling, general and administrative expenses
for the six months of fiscal 2013 were $4.2 million, a decrease of 6.7% compared to $4.5 million during the same period of the
last fiscal year. The decrease resulted from cost savings in the use of professional service firms and rent reductions.

Income tax expense for the six months of
fiscal 2013 was $1.1 million, an increase of 10.0% compared to $1.0 million during the same period of the last fiscal year. The
effective tax rates were 38.2% and 37.8% for the first six months of fiscal 2013 and 2012, respectively.

Net income for the six months of fiscal
2013 was $1.8 million, an increase of 12.5% compared to $1.6 million during the same period of the last fiscal year. Net income
per share, basic and diluted, for the six months of fiscal 2013 was $0.19. Net income per share, basic and diluted, for the six
months of fiscal 2012 was $0.18.

Backlog

We report “funded”
backlog, which represents orders for goods and services for which firm contractual commitments have been received. As of December
28, 2012, funded backlog was approximately $118 million, an increase of 39% compared to approximately $85 million at December
30, 2011 and a 27% increase when compared to the $93 million of backlog at the end of fiscal year 2012. This increase was due
to an increase in the amount of awards won related to work in Afghanistan and recent Performance Based Remediation (“PBR”)
awards for the Air Force.

Results of Operations by Reportable
Segment

The tables below set
forth our operating results by reportable segment for the three and six month periods ended December 28, 2012 and December 30,
2011. The dollar amounts in the three segment tables that follow are in thousands.

16

Engineering and Construction Management

For the Three Months Ended

For the Six Months Ended

December 28, 2012

December 30, 2011

December 28, 2012

December 30, 2011

GROSS REVENUE

$

13,047

$

20,005

$

24,815

$

41,837

Purchased services and materials, at cost

6,653

12,750

11,188

25,593

Direct costs of services and overhead

4,835

4,855

10,075

11,318

GROSS PROFIT

$

1,559

$

2,400

$

3,552

$

4,926

Gross profit percentage

11.9

%

12.0

%

14.3

%

11.8

%

Three Months Ended December 28, 2012 compared to the
Three Months Ended December 30, 2011

Gross revenue
for the second quarter of fiscal 2013 was $13.0 million, a decrease of 35.0% compared to $20.0 million during the second
quarter of the last fiscal year. This decrease was primarily a result of anticipated reductions in government spending for
international reconstruction operations in Iraq. This slowdown was coupled with lower domestic revenue of approximately $1.8
million related to the completion of the Tooele Chemical Demilitarization project during fiscal year 2012. Additionally,
fewer domestic construction and telecommunication projects were offered or awarded to our domestic construction and
telecommunication divisions. Management is currently focused on business development efforts with other US government and
non-governmental agencies in the Middle East in order to offset reduced DoD business and minimize loss of revenues.

Gross profit for the
second quarter of fiscal 2013 was $1.6 million, a decrease of 33.3% compared to $2.4 million during the second quarter of the
last fiscal year. This decrease was a result of the same factors mentioned above. Continued improvements in operational efficiency
both domestically and internationally resulted in maintaining a steady profit margin when compared to the second quarter of the
last fiscal year.

Six Months Ended December 28, 2012 compared to the
Six Months Ended December 30, 2011

Gross revenue
for the first six months of fiscal 2013 was $24.8 million, a decrease of 40.7% compared to $41.8 million during the
corresponding period of the last fiscal year. This decrease was primarily a result of anticipated reductions in government
spending for international reconstruction operations both in Iraq for electrical inspection services and in Afghanistan for
Title II Construction Management Services. This slowdown was coupled with lower domestic revenue of approximately $5.5
million related to the completion of the Tooele Chemical Demilitarization project during fiscal year 2012. Additionally,
fewer domestic construction and telecommunication projects were offered or awarded to our domestic construction and
telecommunication divisions. Management is currently focused on business development efforts with other US government and
non-governmental agencies in the Middle East in order to offset reduced DoD business and minimize loss of
revenues.

Gross Profit for the
first six months of fiscal 2013 was $3.6 million, a decrease of 26.5% compared to $4.9 million during the corresponding period
of the last fiscal year. This decrease was primarily a result of the decrease in revenue. The gross profit percentage increased
2.5% from fiscal year 2012 to fiscal year 2013. Positive changes in contract terms and improvements in efficiency for overseas
operations resulted in higher gross profit percentages for the work executed.

Environmental Services

For the Three Months Ended

For the Six Months Ended

December 28, 2012

December 30, 2011

December 28, 2012

December 30, 2011

GROSS REVENUE

$

7,793

$

7,525

$

16,017

$

15,465

Purchased services and materials, at cost

2,636

2,343

5,695

4,833

Direct costs of services and overhead

3,978

4,747

8,393

9,592

GROSS PROFIT

$

1,179

$

435

$

1,929

$

1,040

Gross profit percentage

15.1

%

5.8

%

12.0

%

6.7

%

17

Three Months Ended December 28, 2012 compared to the
Three Months Ended December 30, 2011

Gross revenue for
the second quarter of fiscal 2013 was $7.8 million, an increase of 4.0% compared to $7.5 million during the second quarter of
the last fiscal year. This increase was due largely to a ramp up in work on PBR’s for the U.S Air Force at various installations
across the United States.

Gross profit for the
second quarter of fiscal 2013 tripled to $1.2 million, compared to $0.4 million in the second quarter of the last fiscal year.
The increase in profitability is due to an increase in direct labor provided by us on the PBR’s and UXO projects. We implemented
measures to increase utilization while reducing indirect labor expenses. Additionally we implemented the use of video conferencing
and other technologies which led to a reduction in travel expenses. We continue to focus on to providing training and project
management tools to our staff in order to increase project profitability.

Six Months Ended December 28, 2012 compared to the
Six Months Ended December 30, 2011

Gross revenue for
the first six months of fiscal 2013 was $16.0 million, an increase of 3.2% compared to $15.5 million during the corresponding
period of the last fiscal year. This increase was primarily a result of the ramp up in PBR work for the U.S Air Force at various
installations across the United States.

Gross Profit for the
first six months of fiscal 2013 was $1.9 million, an increase of 90% compared to $1.0 million during the corresponding period
of the last fiscal year. The increase in profitability is due to an increase in direct labor provided by us on the PBR’s
and UXO projects. We also implemented measures to increase utilization while reducing indirect labor expenses. Additionally we
implemented the use of video conferencing and other technologies which led to a reduction in travel expenses. We continue to focus
on providing training and project management tools to our staff in order to increase project profitability.

Professional Services

For the Three Months Ended

For the Six Months Ended

December 28, 2012

December 30, 2011

December 28, 2012

December 30, 2011

GROSS REVENUE

$

3,875

$

3,750

$

7,434

$

7,262

Purchased services and materials, at cost

602

992

1,334

1,817

Direct costs of services and overhead

2,243

2,146

4,500

4,231

GROSS PROFIT

$

1,030

$

612

$

1,600

$

1,214

Gross profit percentage

26.6

%

16.3

%

21.5

%

16.7

%

Three Months Ended December 28, 2012 compared to the
Three Months Ended December 30, 2011

Gross revenue for
the second quarter of fiscal 2013 was $3.9 million, an increase of 2.6% compared to $3.8 million during the second quarter of
the last fiscal year. This increase was primarily a result of winning more projects at a number of current Army installations
nationwide. As a result, the number of on-site staff provided by us has increased by 6.6%.

Gross profit for the
second quarter of fiscal 2013 was $1.0 million, an increase of 66.7% compared to $0.6 million during the second quarter of the
last fiscal year. This increase was a result of winning more projects and thereby increasing the number of on-site staff provided
by us. We also increased gross profit by implementing measures such as video conferencing to reduce travel and other overhead
expenses.

Six Months Ended December 28, 2012 compared to the
Six Months Ended December 30, 2011

Gross revenue for
the first six months of fiscal 2013 was $7.4 million, an increase of 1.4% compared to $7.3 million during the corresponding period
of the last fiscal year. This increase was primarily a result of winning more projects, and as a result, the number of on-site
staff provided by us has increased.

18

Gross Profit for the
first six months of fiscal 2013 was $1.6 million, an increase of 33.3% compared to $1.2 million during the corresponding period
of the last fiscal year. This increase was primarily a result of increased revenue and staff efficiencies.

Liquidity and Capital Resources

Our working capital
as of December 28, 2012 was approximately $24.8 million, an increase of $2.5 million compared to working capital at June 29, 2012.
In addition, our current ratio at December 28, 2012 was 2.63 compared to 2.32 at June 29, 2012.

As discussed in Note
G – Debt, On September 14, 2012, the Company’s line of credit facility with United Bank (the “Bank”) was
modified to extend its maturity date to September 25, 2014 and to make certain other changes to the terms and conditions governing
the line of credit, including a slight increase in the line of credit commitment fee from 17 basis points to 25 basis points.
The line of credit as amended is subject to certain covenants related to the maintenance of financial ratios. These covenants
require a minimum tangible net worth of $18.5 million; a maximum total liabilities to tangible net worth ratio not to exceed 2.0
to 1; and a minimum current ratio of at least 1.25 to 1. The Company was in compliance with all financial ratio covenants under
the facility as of December 28, 2012. As amended, borrowings under the line of credit bear interest at prime less 0.5% with a
floor interest rate of 3.5%. Failure to meet the financial ratio covenant requirements gives the Bank the right to demand outstanding
amounts due under the line of credit, which may impact the Company’s ability to finance its working capital requirements.
The Company had no outstanding borrowings under the line of credit at December 28, 2012.

We financed a portion
of our fiscal year 2012 acquisition of Charron through seller notes totaling $1.0 million. At December 28, 2012 the outstanding
aggregate principal balance of the notes was $0.8 million. We anticipate that the cash flows from Charron will continue to be
sufficient to pay down the outstanding principal and interest balances of these notes in the foreseeable future.

We believe that our
current cash balance of $13.7 million, our anticipated cash flows from operations, and the funds available from our line of credit
facility will be sufficient to meet our ongoing liquidity needs. Our expected capital requirements for the full 2013 fiscal year
are approximately $1.1 million and will be funded through existing working capital. These capital expenditures will be used primarily
for upgrades to maintain our existing information technology systems, equipment related to our range management projects, and
upgrades to our personal protective equipment manufacturing facility.

Critical Accounting Policies and Related
Estimates

There have been no
material changes with respect to the critical accounting policies and related estimates as disclosed in our Annual Report on Form
10-K for the fiscal year ended June 29, 2012.

ITEM 3. Quantitative
and Qualitative Disclosure about Market Risk

We have not entered
into any transactions using derivative financial instruments or derivative commodity instruments and we believe that our exposure
to interest rate risk and other relevant market risk is not material.

ITEM 4. Controls
and Procedures

As of the last day
of the period covered by this report, the Company carried out an evaluation, under the supervision of the Company’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and procedures are effective, as of such date, to ensure
that required information will be disclosed on a timely basis in its reports under the Exchange Act.

19

Further, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures have been designed to
ensure that information required to be disclosed in reports filed by us under the Exchange Act is accumulated and communicated
to our management, including the Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding
the required disclosure.

There were no changes
in the Company’s internal control over financial reporting during the quarter ended December 28, 2012 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.Legal
Proceedings

We are parties from
time to time to various legal actions arising in the normal course of business. We believe that any ultimate unfavorable resolution
of these legal actions will not have a material adverse effect on our consolidated financial condition and results of operations.

ITEM 2. Unregistered
Sales of Equity Securities and Use of Proceeds

During the second
quarter of fiscal year 2013 our employees surrendered shares of common stock to us to pay tax withholding obligations upon vesting
of restricted stock units. The purchase price of this stock was based on the closing price of our common stock on the NYSE Amex
on the date of surrender.

Purchase of Equity Securities

Period

Total Number of Shares Purchased

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

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